4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 1 I. INTRODUCTION These guidelines have been established to ensure uniformity and consistency in examination of withholding tax records. The procedures and audit techniques apply to Article 22 of the New York State Tax Law. Guidelines are issued to provide general guidance to audit staff. As with all guidelines, auditors must use discretion and common sense when applying these guidelines. These guidelines should be used to provide a general framework when conducting a withholding tax audit. An auditor must look at the specific facts and circumstances when conducting an audit and ensure that employers are in general compliance with the Tax Law and Regulations. The guidelines do not replace existing law, regulations, forms or publications. The withholding tax field audit program is designed to monitor compliance with the Tax Law and to safeguard the multi-billion dollar voluntary withholding tax base. It is not designed to place an undue burden on employers, nor to discourage employers from sending employees into New York State for business purposes. This guideline attempts to address certain areas through examples, procedure statements, and common sense approaches. Audit staff should balance the audit process to ensure that New York State revenues are protected and, at the same time, economic activity in New York by non-resident employers and employees is encouraged, and that burdens placed on taxpayers are minimized. Throughout the guideline, reference is made to withholding tax and/or New York State withholding tax. Where appropriate, this also includes withholding of New York City and city of Yonkers taxes. The Tax Law and Regulations, court cases and Tribunal Decisions, along with Department policy materials, should be referred to when researching a particular issue. References to the Tax Law in these guidelines are meant to highlight general points of law and are not meant to be an authority on interpreting the Tax Law.
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 2 II. WITHHOLDING TAX LAW, REGULATIONS AND POLICIES New York State Tax Law provides for the withholding of New York State, New York City, and Yonkers personal income tax from wages of all resident employees for services performed either within or without of the taxing jurisdiction. The Tax Law also provides for income tax withholding from wages of nonresidents for services performed within New York State and Yonkers. The responsibility of the employer to withhold personal income tax for New York State, New York City, and Yonkers is separate and distinct. Therefore, withholding a greater amount for one jurisdiction to cover a shortfall in another jurisdiction is inappropriate and is not permitted. Regulation Section 171.1 states that every employer maintaining an office or transacting business within New York State must deduct and withhold from wages an amount of personal income tax that will result in withholding from the employee=s wages an amount substantially equivalent to the New York State personal income tax reasonably estimated to be due as the result of the inclusion of the employee=s wages received during the calendar year in the employee=s New York adjusted gross income. Regulation section 174.2 states: Every employer maintaining an office or transacting business within New York State and making payments of any wages taxable under Article 22 of the Tax Law to a resident or a nonresident individual whether or not such wages are sufficient to require the withholding of New York State personal income tax, and every employer required to file a wage reporting return pursuant to section 171-a of the Tax Law with respect to gross wages paid to at least one employee performing employment, whether or not such an employee is a resident of New York State for purposes of the Tax Law and whether or not such wages are subject to withholding of New York State personal income tax or payment of New York State personal income tax under article 22 of the Tax Law, must file quarterly combined withholding and wage reporting returns in accordance with the provisions of this section. In general, the withholding provisions of the Tax Law parallel the federal Internal Revenue Code. The New York State Tax Law specifically adopts the federal terms such as "employer," "employee," "wages," "payroll period," and "withholding exemptions," except as otherwise specifically provided in Article 22 or where the federal rules and definitions are clearly inconsistent with and inapplicable to the provisions of Article 22 of the Tax Law.
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 3 A) EMPLOYERS 1) WHO ARE EMPLOYERS? Section 171.2 of the Regulations state that an employer is any person or organization qualifying as an employer on the basis of the instructions contained in Federal Circular E and maintaining an office or transacting business within New York State, whether or not a paying agency is maintained within the state. An entity s status as an employer is not tied to that entity s status as a taxpayer in New York State. For example, under federal Public Law 86-272, a foreign corporation is exempt from tax on or measured by income if its activities in a state are limited to the solicitation of orders by the corporation s employees, representatives or independent contractors for sales of personal property, which orders are sent outside the State for approval or rejection, and which if approved, are filled by shipment or delivery from a point outside the state. However, this law does not relieve an employer which is transacting business or is maintaining an office in New York State from withholding taxes on employees of the corporation working in New York State. Public Law 86-272 prohibits an income tax where the only activity is the solicitation of orders. Withholding does not represent the imposition of an income tax on the employer. A foreign corporation which has employees that are performing services in New York State is transacting business and must withhold taxes from these employees, even though the corporation itself cannot be taxed. Designation of third parties to perform acts required of employers - Regulation Section 177.1 states that the Tax Department may authorize a fiduciary, agent or other person to perform acts as required of employers. One example would be a Common Paymaster situation. All provisions of the Tax Law (including penalties) applicable to employers then become applicable to the third party. However, the employer also remains subject to all provisions of the Tax Law (including penalties). Reporting or Service Agencies - Regulation Section 174.8 states that employers or groups of employers may utilize a reporting or service agency to file New York State employer=s returns and remit payments of withheld taxes on their behalf. Examples of Reporting or Service Agencies would be payroll companies such as ADP, Paychex or Probusiness. The filing of New York State employer=s returns and remittance of withheld taxes by a reporting or service agency on behalf of employers or groups of employers does not relieve each such employer from all provisions of law (including penalties) applicable in respect of employers. 2) WHAT ARE TAXABLE WAGES Section 171.3 of the Regulations defines the term "wages" in general terms. In most instances payments which are considered wages for federal income tax withholding purposes are also wages for purposes of withholding New York State personal income tax. For additional information regarding the New York State withholding tax requirements for various types of income, please refer to the applicable chart in Publication NYS-50, Employer=s Guide to Unemployment Insurance, Wage Reporting, and Withholding Tax.
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 4 Income Tax Regulations Section 31.3401(a)-1 defines wages, in general, as all remuneration for services performed by an employee for his employer, and includes: - Salaries, fees, bonuses, commission on sales or on insurance premiums, pensions, and retirement pay. - Remuneration paid on the basis of piecework or a percentage of profits, and may be paid hourly, daily, weekly, monthly or annually. - Remuneration paid in cash or something other than cash such as stocks, bonds, or other forms of property. If services are paid for in a medium other than cash, the fair market value of the thing taken in payment is the amount to be included as wages. If a corporation transfers to its employees its own stock as remuneration for services rendered by the employee, the amount of such remuneration is the fair market value of the stock at the time of the transfer. - Remuneration for services even if at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them. - Salary of an employee on vacation, paid notwithstanding his absence from work. - Any payments made by an employer to an employee on account of dismissal, or involuntary separation from the service of the employer. i) OTHER EXAMPLES OF WAGES SUBJECT TO WITHHOLDING TAX ARE: Dividends vs. Compensation - Dividends of a corporation received by its shareholders instead of reasonable compensation in the same amounts for services performed are deemed to be wages for withholding tax purposes. Employee tax paid by employer - If an employer pays any tax liability of the employee without making a deduction from his pay, the amount paid is wages. ii) EXAMPLE OF WAGES NOT SUBJECT TO WITHHOLDING TAX: Partner draws or salary - Bona fide partners are not employees of the partnership, and withholding tax does not apply to their partners' draws or salaries. See Section 171.3 of the Regulations for other examples of where the term wages does not apply for the purposes of withholding New York State personal income tax. 3) REQUIREMENT OF EMPLOYERS TO WITHHOLD TAX According to Section 671 of the New York State Tax Law, every employer maintaining an office or transacting business within New York State and making payments of any taxable wages to a resident or nonresident individual must deduct and withhold from such wages for each payroll period a tax computed in such a manner as to result, as far as practicable, in withholding from the employee's wages during each calendar year an amount substantially equivalent to the personal income tax reasonably estimated to be due resulting from the inclusion
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 5 in the employee's adjusted gross income or New York source income of his wages received during each calendar year. Limitation on assessment - Tax Law Section 683(b)(2) states that, if a return of withholding tax for any period ending with or within a calendar year is filed before April fifteenth of the succeeding calendar year, such return shall be deemed to be filed on April fifteenth of such succeeding calendar year. 4) EMPLOYER FILING AND PAYMENT REQUIREMENTS Every employer required to deduct and withhold tax must file a withholding return and pay over the taxes so required to be deducted and withheld per the requirements set forth in Regulation Sections 174.1 and 174.2. These withholding tax filing rules and return requirements can also be found in the instructions for the withholding tax forms and in Publication NYS-50, Employer=s Guide to Unemployment Insurance, Wage Reporting, and Withholding Tax. Prior to 1999, these rules and requirements were located in Publication WT-100, New York State Withholding Tax Guide. The withholding tax forms were revised for tax year 1999 and now differ from those utilized during tax years 1992 through 1998. A comparison summary between the old and new forms can be found in Appendix A of these guidelines. Although the new forms beginning in 1999 include New York State Department of Labor Unemployment Insurance information, please note that the income tax auditor is not responsible for verification of Unemployment Insurance figures. If asked any questions, the auditor should refer the taxpayer to the phone numbers listed in Publication NYS-50 for the New York State Department of Labor. FILING REQUIREMENTS: 1. Filers required to withhold less than $700 in a calendar quarter a) Filing Rules Employers required to withhold less than $700 of state and local taxes in a calendar quarter shall remit their tax withheld with the quarterly combined return (Form NYS-45), whether or not they filed any Forms NYS-1 during the quarter. The quarterly combined withholding, wage reporting and unemployment insurance return (Form NYS-45) for the first three calendar quarters are due no later than the last day of the month following the end of the quarter. The fourth quarter return is due no later than February 28 of the succeeding year. b) Return Requirements i) To report withholding and remit withholding tax: Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return (Form NYS-45) ii) To report quarterly employee gross wage information and to report annual wage and withholding information for each employee: Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return (Form NYS-45), AND, IF MORE THAN FIVE EMPLOYEES, Quarterly Combined Withholding and Wage Reporting Return Attachment (Form NYS-45-ATT)
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 6 2. Filers required to withhold $700 or more in a calendar quarter a) Filing Rules An employer must file Form NYS-1 and remit the total tax withheld after each payroll that causes the total accumulated tax required to be withheld to equal or exceed $700. If the employer makes more than one payroll within a week (Sunday through Saturday), the employer is not required to file until after the last payroll in the week. However, when a calendar quarter ends between payrolls paid within a week, any accumulated tax required to be withheld of at least $700 must be remitted with Form NYS-1 after the last payroll in the quarter. If an employer filed at least once during the calendar quarter, and has an unremitted balance of tax withheld that is less than $700 after the last payroll of the quarter, the employer may remit this amount with their quarterly return Form NYS-45 instead of with a Form NYS-1. Every employer required to withhold taxes from wages or other payment (e.g., pensions) must file Form NYS-45, Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return, and detail the quarter's withholding tax transactions and wage reporting information. The employer must file a Form NYS-45 each quarter regardless of whether they were required to withhold tax for the quarter (unless they qualify as a seasonal employer). Every employer must complete and file Form NYS-45 (or NYS-45-ATT if more than five employees) showing each employee who resides or is employed in New York State, whether or not the wages of such employee are subject to withholding of tax or payments of tax under Article 22 of the Tax Law. In addition, employers who were required to report 250 or more employee/payee records in the previous four consecutive quarters are required to file Forms NYS-45-ATT on magnetic media. b) When Returns Are Due If an employer was required to withhold less than $15,000 for the calendar year that precedes the previous calendar year, the employer's NYS-1 return and payment are due on or before the fifth business day following the payroll in which their tax withheld equaled or exceeded $700. If an employer was required to withhold $15,000 or more for the calendar year that precedes the previous calendar year, their return and payment are due on or before the third business day following the payroll in which their tax withheld equaled or exceeded $700 (the tax department will notify the employer of their filing due date based on our record of their total tax due). New businesses have five business days to remit until they are notified by the Department to file within three business days. As with employers with less than $700 in withholdings, the NYS-45 returns for the first three calendar quarters are due no later than the last day of the month following the end of the quarter. The fourth quarter return is due no later than February 28 of the succeeding year. c) Return Requirements - Employers must file the following documents:
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 7 i) To file and remit withholding tax: Return of Tax Withheld (Form NYS-1) ii) To report quarterly withholding tax reconciliation information: Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return (Form NYS-45) iii) To report quarterly employee gross wage information and to report annual wage and withholding information for each employee: Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return (Form NYS-45) AND, IF MORE THAN FIVE EMPLOYEES, Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return Attachment (Form NYS-45-ATT) iv) To amend quarterly withholding tax reconciliation information: Amended Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return. (Form NYS-45-X) 5) INFORMATION STATEMENT FOR EMPLOYEE Regulation Section 172.1 states that every employer required to deduct and withhold tax from the wages of an employee, or who would have been required to deduct and withhold tax if the employee had claimed no more than one withholding exemption, shall furnish to each such employee on or before February fifteenth of the succeeding year, or, if his employment is terminated before the close of such calendar year, within thirty days from the date on which the last payment of the wages is made, a statement, in duplicate, on federal form W-2 Wage and Tax Statement, showing the amount of wages, tips and other compensation paid by the employer to the employee during the calendar year, the amount deducted and withheld as New York State personal income tax, and all of the other information required to be shown on such form. Where federal form W-2 is required to be furnished to an employee, whether the employee is a resident or a nonresident, the total of such employee's wages, tips and other compensation with respect to services performed both within and without New York State must be reported in the State Wages, Tips, etc. box on such federal form W-2. For more information on this subject see TSBM-02(3)I, Employer Requirements Concerning the Reporting of New York State, City of New York, and City of Yonkers Wages Beginning with tax year 2003. Employers need not file a copy of Form W-2 with New York State. Instead, employers must report annual wage and withholding information on the fourth quarter Form NYS-45 (or NYS-45-ATT, if applicable). 6) RETENTION OF RECORDS
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 8 Section 158.4(a) of the Regulations states that every employer or withholding agent required to deduct and withhold New York State personal income tax upon the wages of employees, and every person required to file New York State information returns must keep all records pertinent to withholding of New York State personal income tax and New York Sate information returns available for examination and inspection by the Tax Commission, or its authorized representatives. Records with respect to New York State personal income tax withheld must be retained for a period of four years after the due date of the New York State personal income tax withheld for the return period to which the records relate, or the date the New York State personal income tax withheld was paid, whichever is later. Records with respect to New York State information returns must be retained for a period of four years after the due date of the New York State information return. Regulation 158.4(b) describes the types of records that should be maintained by employers. Regulation Section 158.4(c) states that, for nonresident employees performing services partly within and partly without New York State, a record of the allocation used for withholding purposes must be kept. Regulation Section 2402.1 and Section 2402.2 contain a discussion of electronic record keeping and retention. Regulation Section 171.6(b)(5) states that form IT-2104.1 must be retained by the employer and must be available for inspection. EMPLOYEES 1) WHO ARE EMPLOYEES? As explained in IRS Publication 15-A, Employer's Supplemental Tax Guide, the manner in which payments for services are treated depends upon the business relationship that exists between the employer and the person performing the services. The person performing the services may be: C C C C an independent contractor, a common-law employee, a statutory employee, or a statutory nonemployee. Independent Contractors People such as lawyers, contractors, subcontractors, public stenographers, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 9 Common-Law Employees Under common-law rules, anyone who performs services is an employee if the employer can control what will be done and how it will be done. This is so even when the employer gives the employee freedom of action. What matters is that the employer has the right to control the details of how the services are performed. If an employer-employee relationship exists, it makes no difference how it is labeled. The substance of the relationship, not the label governs the worker=s status. Nor does it matter whether the individual is employed full time or part time. For employment tax purposes, no distinction is made between classes of employees. Superintendents, managers and other supervisory personnel are all employees. Corporate Officers According to Section 3121(d)(1) of the Internal Revenue Code, the term employee also means any officer of a corporation. An officer of a corporation is generally an employee; however, an individual that sits on the board of directors is not. An officer who performs no services or only minor services, and neither receives nor is entitled to receive any pay, is not considered an employee. Leased employees Under certain circumstances, a corporation furnishing workers to various professional people and firms is the employer of those workers for employment tax purposes. For example, a professional service corporation may provide the services of secretaries, nurses and other similarly trained workers to its subscribers. The service corporation enters into contracts with the subscribers under which the subscribers specify the services to be provided and the fee to be paid to the service corporation for each individual furnished. The service corporation has the right to control and direct the worker=s services for the subscriber, including the right to discharge or reassign the worker. The service corporation hires the workers, controls the payment of their wages, provides them with unemployment insurance and other benefits and is the employer for employment tax purposes. Statutory Employees Four categories of workers who are independent contractors under the common law are treated by statute as employees. They are called statutory employees. Income taxes are NOT required to be withheld from the wages of statutory employees. Only social security, Medicare and FUTA (Federal Unemployment Tax) taxes are required to be withheld from wages paid to certain statutory employees. 1. A driver who distributes beverages (other than milk), meat, vegetable, fruit or bakery products, or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 10 2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company. 3. An individual who works at home on materials or goods that the employer supplies and that must be returned to the employer or to a person the employer names, if the employer also furnishes specifications for the work to be done. 4. A full-time traveling or city salesperson who works on the employer=s behalf and turns in orders to the employer from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer=s business operation. The work performed for the employer must be the salesperson=s principal business activity. Statutory Nonemployees There are two categories of statutory nonemployees: direct sellers and licensed real estate agents. They are treated as self-employed for all federal tax purposes, including income and employment taxes, if: 1. Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked, and 2. Their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes. Direct sellers - Direct sellers include persons falling within any of the following three groups: 1. Persons engaged in selling (or soliciting the sale of) consumer products in the home or place of business other than in a permanent retail establishment. 2. Persons engaged in selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis prescribed by regulations, for resale in the home or at a place of business other than in a permanent retail establishment. 3. Persons engaged in the trade or business of the delivery or distribution of newspapers or shopping news (including any services directly related to such delivery or distribution). Direct selling includes activities of individuals who attempt to increase direct sales activities of their direct sellers and who earn income based on the productivity of their direct sellers. Such activities include providing motivation and encouragement; imparting skills, knowledge, or experience; and recruiting. Licensed real estate agents - This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output. Salespersons
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 11 To determine whether salespersons are employees under the common-law rules (as discussed in Section III, Part 6 of these guidelines), the auditor must evaluate each individual case. If a salesperson does not meet the tests for a common-law employee, the employer does not have to withhold income tax from his or her pay (see Statutory Employees earlier). However, even if a salesperson is not an employee under the usual common-law rules, his or her pay may still be subject to social security and Medicare taxes and FUTA taxes. To determine whether a salesperson is an employee for social security, Medicare, and FUTA tax purposes, the salesperson must meet all eight elements of the statutory employee test. A salesperson is an employee for social security, Medicare and FUTA tax purposes if he or she: 1) Works full-time for one person or company except, possibly, for sideline sales activities on behalf of some other person, 2) Sells on behalf of, and turns his or her orders over to, the person or company for which he or she works, 3) Sells to wholesalers, retailers, contractors, or operators of hotels, restaurants, or similar establishments, 4) Sells merchandise for resale, or supplies for use in the customer=s business, 5) Agrees to do substantially all of this work personally, 6) Has no substantial investment in the facilities used to do the work, other than in facilities for transportation, 7) Maintains a continuing relationship with the person or company for which he or she works, and 8) Is not an employee under common-law rules. 2) DETERMINING TAX TO BE WITHHELD Regulation Section 171.4 indicates that the amount of New York State personal income tax to be deducted and withheld by an employer must be determined in accordance with one of the following methods: METHOD I - Wage Bracket Table Method METHOD II - Exact Calculation Method The wage bracket table method and the exact calculation method can be found in Publication NYS-50-T, New York State, City of New York, and City of Yonkers Withholding Tax Tables and Methods. Supplemental Wages - If an employer pays supplemental wages (bonuses, commissions, overtime pay, sales awards, etc.) with regular wages but does not specify the amount of each, the employer should withhold income tax as if the total were a single payment for a regular payroll period.
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 12 If an employer pays supplemental wages separately (or combines them in a single payment and specifies the amount of each) the income tax withholding method depends partly on whether or not the employer withholds income tax from an employee s regular wages: If the employer withholds income tax from an employee s regular wages, the employer can use one of the following methods for the supplemental wages. A. Withhold at the supplemental rates; see Publication NYS 50-T for withholding tables. B. Add the supplemental and regular wages for the most recent payroll period this year. Then figure the income tax withholding if the total were a single payment. Subtract the tax already withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If an employer does not withhold income tax from the employee s regular wages, use method b. (this would occur, for example, when the value of the employee s withholding allowances claimed on Form W-4 is more than the wages. Vacation Allowances - Amounts of vacation allowances are subject to withholding as though they were regular wage payments made for the period covered by the vacation. Payroll Periods - The New York State personal income tax is to be withheld on the basis of the same payroll period which is required to be used by the employer for federal income tax purposes. Withholding Exemptions - In determining the proper New York State personal income tax to be deducted and withheld from an employee's wages, an employee is entitled to the same number of withholding exemptions as the number of New York exemptions such employee is allowed pursuant to section 616 of the Tax Law plus such additional New York State withholding allowances in accordance with forms and instructions of the Department of Taxation and Finance (see Form IT-2104, Employee's Withholding Allowance Certificate and Instructions). In lieu of New York State Form IT-2104, an employer may accept a properly completed federal Form W-4 from an employee, unless the employee has claimed exempt on Form W-4. 3) EMPLOYEES WITHHOLDING ALLOWANCE CERTIFICATE (IT-2104) Regulation Section 171.4 states that in lieu of New York State form IT-2104, an employer may accept a properly completed federal Form W-4 from an employee. Regulation Section 171.4 also permits for situations where the employer must obtain a completed Employee's Withholding Allowance Certificate (Form IT-2104) from the employee. Additional information regarding the filing of Form IT-2104 is noted below. a) If an employee has not filed a federal Form W-4, or if an employee wishes to claim withholding exemptions other than those claimed for federal income tax withholding purposes, the employer must obtain a completed Form IT-2104, Employees Withholding Allowance Certificate, from the employee. The employee shall be entitled to claim only those withholding exemptions allowable on a properly completed Form IT-2104.
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 13 b) If an employer is notified by the Internal Revenue Service that a federal Form W-4 for an employee is defective, then the number of exemptions allowable for New York State personal income tax withholding purposes for that employee is limited to the maximum number of withholding exemptions specified by the Internal Revenue Service, less the withholding exemptions allowed for federal credits, plus the number of additional New York State withholding allowances claimed on a properly completed Form IT-2104. c) An employer must submit a copy of any Form IT-2104, together with a copy of any written statement received from the employee in support of the claims made on the certificate, if the employee is employed by that employer on the last day of the reporting period and if the total number of withholding exemptions and allowances claimed on the Form IT-2104 exceeds 14. d) Employers are required to submit a copy of an IT-2104, or make the original available for inspection, upon written request of the Tax Department. The auditor may request verification of the submission of an IT-2104 to New York State. All requests should be made through Field Audit Management, and require the tax year Form IT-2104 was sent to New York State, the tax years under examination, employer name, employer identification number, employee name and employee social security number. 4) DETERMINING TAX TO BE WITHHELD ON WAGES PAID TO NEW YORK STATE RESIDENTS Regulation Section 171.5 states that all wages paid to a resident of New York State are subject to withholding of New York State personal income tax, even though some or all of the services for which the wages are paid were performed outside New York State. In addition, an employer required to deduct and withhold income taxes of other states, political subdivisions of other states, or the District of Columbia, from wages paid to a resident of New York State, must also deduct and withhold New York State personal income tax from those wages. The amount of New York State personal income tax to be deducted should be determined under the applicable wage bracket withholding table or other method provided for in Section 171.4 of the Regulations, less the amount required to be deducted and withheld from those wages under the laws, rules and regulations of such other states, political subdivisions, or the District of Columbia. Example 1: An employer transacting business in New York State has a New York State resident employee working in both New York and neighboring State A. The amount of wages earned in State A is $70 per week and in New York is $30 per week. If one exemption is claimed by the employee, the employer is required by State A law to deduct State A tax of $1.53. The amount of New York State tax to be withheld on $100 is $2.60; however, according to Section 171.4 of the Regulations, the amount of New York State personal income tax required to be withheld is reduced by the State A tax withheld. Thus, this employer is required to withhold and submit $1.07 ($2.60 less $1.53) to New York State for this employee.
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 14 Example 2: An employer transacting business in New York State has a New York State resident employee working in both New York and neighboring State B. The wages earned in State B are $100. If one exemption is claimed by the employee, the employer is required to deduct $3.34 for State B tax. The amount of New York State tax to be withheld on $100 is $2.60. Since the State B amount is above the $2.60 New York State tax required to be withheld, under Section 171.4 of the Regulations, no New York State tax would be withheld. Determining residence status of employees - Employers may rely on information provided by employees regarding residence, provided the information is accepted by the employer in good faith, and the employer did not have any actual knowledge or reason to know the statement is incorrect or unreliable. Forms W-4, IT-2104, IT-2104-E, IT-2104.1, etc., represent examples of acceptable methods of employee address notification. For example, an employee working in New York provides a New Jersey address as his or her primary residence. The employee s actual home address and domicile is in New York City. The employer has no record or knowledge of the employees actual address. In this situation, the employer may withhold based on the New Jersey principal address and may treat the employee as a nonresident of New York State and New York City. The employee is then responsible for filing correct tax returns and paying applicable New York State and New York City resident taxes. However, if the same employee maintains control of all financial transactions of the business, the employer is then deemed to have had actual knowledge and should have withheld the appropriate New York State and New York City taxes. Statutory resident - There is no burden on an employer to determine if a nonresident employee may be held taxable as a New York resident based on the 183 day rule, provided the employer is not aware of a New York address. For example, an employee working in a New York office provides a New Jersey address as his or her primary residence. The employee is also a statutory resident of New York State and New York City but never communicates that fact in accordance with the employer s procedures. In this situation, the employer may withhold based on the New Jersey principal address and may treat the employee as a nonresident of New York State and New York City. The employee is then responsible for filing correct tax returns and paying applicable New York State and New York City resident taxes. 5) DETERMINING TAX TO BE WITHHELD ON WAGES PAID TO NEW YORK STATE NONRESIDENTS Nonresident employees who perform all services in New York State If a New York State nonresident employee performs all of his or her services in New York State, personal income tax must be withheld from all wages paid to the employee in accordance with the employee s withholding allowance certificate (federal Form W-4 or New York State Form IT-2104) and the applicable withholding methods as shown in Publication NYS-50-T, New York State, City of New York, and City of Yonkers Withholding Tax Tables and Methods. An employer may not accept Form IT-2104.1 estimating the percentage of wages attributable to services performed in New York State from such employee. Employers should be aware that a nonresident employee whose primary work location is in New York is not allowed to consider a day worked outside of New York (for
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 15 example, from home) for the convenience of the employee, as opposed to the necessity of the employer, as a day worked outside New York unless the employee does not enter New York during the tax year. An office in an employee=s home is not considered to be a primary work location. Example 1: Employee A is a New York State nonresident employee who is assigned to work in the employer s New York office. Employee A has no work assignments that require him to perform any services outside of the New York office. Employee A submits a Form IT-2104.1 to his employer estimating the percentage of wages attributable to services performed in New York State as 90%. The employer may not accept the form since the employer has actual knowledge that employee A performs 100% of his services in New York State. The employer must withhold New York State personal income tax on all wages paid to employee A. If the employer did accept the form and only withholds on 90% of employee A s wages, the employer would be liable for any additional tax, penalty, and interest on employee A s under withholding. Example 2: Employee B is a New York State nonresident employee assigned to the employer s New York office. The employer has a telecommuting program which allows employees to work from their homes. Employee B participates in this program and works two days per week in the New York office and three days per week at home. The work employee B performs at home is the same work employee B performs in the New York office. Employee B submits a Form IT-2104.1 to the employer estimating the percentage of wages attributable to services performed in New York as 40%. The employer may not accept the form since the employer has actual knowledge that it is not correct. (Days worked at home for the convenience of the employee, as opposed to necessity of the employer, are considered days worked in New York.) The employer must withhold New York State personal income tax on all wages paid to employee B. If the employer did accept the form and only withholds on 40% of employee B s wages, the employer would be liable for any additional tax, penalty, and interest on employee B s under withholding. Nonresident employees who perform services both in and out of New York State If a New York State nonresident employee performs services partly in the state, only the wages for services performed inside the state are subject to withholding of New York State personal income tax. The audit division has adopted a new policy concerning the withholding requirements for employers who have nonresident employees that perform services both inside and outside New York State. The Tax Law requires that employers withhold on their employees, so far as practicable, an amount substantially equivalent to the tax reasonably estimated to be due from the inclusion of the wages in the employees New York adjusted gross income or New York source income (Tax Law section 671(a)(1). The new policy addresses what factors and statements an employer should consider in determining what the reasonable estimate of tax due should be. The policy allows employers to rely on the guidelines set forth below with respect to the requirements of Tax Law section 671(a)(1). Also, as part of the new policy the audit division recognizes that withholding will not be required on wages paid to certain employees who are assigned to a primary work location outside of New York State who perform services in the state for 14 or fewer days during the calendar year. (Please refer to 14 day guidance below).
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 16 This new policy is effective as of the date of issuance of these guidelines, and should be incorporated into all open audits. Transitional period - The auditor should take a transitional period into consideration when deciding whether to impose or not impose penalties on nonresident withholding issues. For example, if a company is making reasonable efforts to comply with nonresident withholding requirements, including but not limited to implementing and perfecting new systems for nonresident withholding, the auditor may decide not to impose penalties on nonresident issues if there are no other facts present which would warrant imposition of penalties. The transitional period will extend through the 2005 payroll cycle. - Nonresident employees assigned to a primary work location within New York State who perform services both in and out of New York State In determining the proper amount of wages subject to New York State withholding, an employer may rely on the guidance below. If a nonresident employee s primary work location is located in New York State, then the employer will be required to withhold on 100% of the compensation unless any of the following apply: 1. The employee, either at the employer s request or the employee s, furnishes the employer with Form IT-2104.1. The IT-2104.1 must contain a certification that the employee is a nonresident and show the estimated percentage of services that will be performed in New York; or 2. The employer has adequate records to determine the proper amount of tax to be withheld from compensation for services performed in New York. The employer may rely on a Form IT-2104.1 submitted by an employee as long as the employer does not have actual knowledge or reason to know that the Form IT-2104.1 is or has become incorrect or unreliable If the employer has actual knowledge or reason to know that the IT-2104.1 is or has become incorrect or unreliable, it should redetermine the proper amount of withholding using the guidance above. An employer is considered to have reason to know that Form IT-2104.1 is incorrect if its knowledge of relevant facts or of statements contained in the form is such that a reasonably prudent person in the position of the employer would question the claims made. An employer is considered to have actual knowledge or reason to know that Form IT-2104.1 has become incorrect or unreliable if a reasonably prudent person in the position of the employer would question the accuracy of the Form IT-2104.1 which is on file. An employer is deemed to have actual knowledge or reason to know that Form IT- 2104.1 has become incorrect if there has been a significant change in the employee=s work assignment or the employee gives the employer information which indicates the employee has become a New York State resident. Significant changes in work assignment include, but are not limited to: promotions, change of primary work location (either permanent or for a significant temporary period) and a change in duties.
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 17 Employers should be aware that a nonresident employee whose primary work location is in New York is not allowed to consider a day worked outside of New York (for example, from home) for the convenience of the employee, as opposed to the necessity of the employer, as a day worked outside New York unless the employee does not enter New York during the tax year. An office in an employee=s home is not considered to be a primary work location. Employers may not accept or rely on a Form IT-2104.1 that shows a percentage of less than 100% if the employee=s primary work location is New York and the employer reasonably expects the employee to have no duties assigned outside New York. Employees who expect to perform no services in New York may submit, but are not required to submit, an IT-2104.1 to their employer estimating a percentage of services performed in New York of 0%. The employer may rely on the IT-2104.1 as long as the employer does not have actual knowledge or reason to know that the Form IT-2104.1 is or has become incorrect or unreliable. What follows are examples of how this guidance will work. Employee M and Employee N are system analysts assigned to Corporation R s New York office. Employee M and Employee N are both nonresidents of New York. Both employees have historically performed services in New Jersey on an as needed basis which is determined based on the particular project that they are assigned to. On January 2, 2001, both employees submit an IT-2104.1 to their employer estimating the percentage of services performed in New York as 65%. The supervisor of the two employees reviews the IT-2104.1 forms submitted and, based on past experience and a reasonable estimate of work in the foreseeable future, approves the IT-2104.1 forms and submits the forms to the payroll department. The employer therefore accepts the two IT-2104.1 forms and has no actual knowledge or reason to know that they are incorrect. During calendar year 2001, both employees continue to perform services which are typical of past years and could reasonably be expected to yield a work percentage of 65%. On March 15, 2002 Employee M is assigned a project which will require Employee M to work in New York for 85% of his time for the next two years. In this instance, the employer could no longer rely on the IT-2104.1 submitted by Employee M on January 2, 2001, since the employer has reason to know or actual knowledge that the IT-2104.1 has become incorrect or unreliable. The employer knows this since there has been a significant change in Employee M s work assignment. If the employer were to continue to rely on the IT-2104.1 submitted by Employee M after March 15, 2002, the employer would be liable for any additional tax, penalty and interest on Employee M s underwithholding. Since there has been no significant change to Employee N s assignment the employer could continue to rely on the IT-2104.1 submitted by Employee N. On June 2, 2002 Employee P is hired by the corporation. Employee P is a nonresident of New York and is a system analyst assigned to the same project as Employee M. On June 2, 2002, Employee P submits an IT-2104.1 to his employer estimating the percentage of services performed in New York as 65%. The employer can not accept or rely on this IT-2104.1 since the employer has actual knowledge that system analysts working on this particular project are expected to perform 85% of their services in New York. If the employer were to accept and the IT-2104.1 submitted by Employee P and withhold on only 65% of Employee P s wages, the employer would be liable for any additional tax, penalty and interest on employees P s underwithholding.
4/5/2005 WITHHOLDING TAX FIELD AUDIT GUIDELINES Page 18 Employee E is an executive and officer of Corporation C and is assigned to the Corporation C s New York office. Employee E is a nonresident of New York State. Corporation C has 5 employees and Employee E maintains control of all financial transactions of the business. On January 2, 2003 Employee E submits an IT-2104.1 to his employer estimating the percentage of services performed in New York as 50%. Employee E has always performed between 90% to 95% of his services in New York and is expected to continue to perform between 90% to 95% of his services in New York in the future. The employer may not accept the IT-2104.1 since Corporation C has actual knowledge it is not correct. If the employer were to accept the IT-2104.1 and withhold on only 50% of Employee E s wages, the employer would be liable for any additional tax, penalty and interest on Employee E s underwithholding. Employee F is a customer service representative assigned to Corporation D s New York office. Corporation D has forty thousand employees and fifteen thousand of these employees work in New York. Employee F is a New York nonresident. Employees in employee F s department and in employees F s job title perform 98%- 100% of their services in New York. Employee F performs services which are typical for employees in Employee F s department and job title On January 2, 2003 Employee F submits an IT-2104.1 to his employer estimating the percentage of services performed in New York as 10%. The employer may not accept the IT- 2104.1 since the employer has actual knowledge it is not correct. The employer has actual knowledge because employees in F s job title and department do not perform 10% of their services in New York. If Corporation D were to accept the IT-2104.1 and withhold on only 10% of employee F s wages, Corporation D would be liable for any additional tax, penalty and interest on Employee F s underwithholding. - Nonresident employees assigned to a primary work location outside New York State who perform services both in and out of New York State In determining the proper amount of wages subject to New York State withholding, an employer may rely on the guidance below. If a nonresident employee s primary work location is located outside of New York State and the employee performs services in New York State, then the employer will be required to withhold on 100% of the compensation unless any of the following apply: 1. the employee, either at the employer s request or the employee s, furnishes the employer with Form IT-2104.1. The IT-2104.1 must contain a certification that the employee is a nonresident and show the estimated percentage of services that will be performed in New York; or 2. the employer has adequate records to determine the proper amount of tax to be withheld from compensation for services performed in New York. 3. The employer is not required to withhold any New York tax if the employer reasonably expects the employee to perform services 14 or fewer days in New York for the tax year 1. For more information on the 14 day guidance see the section entitled Wages paid to nonresident employees who work in New York for 14 or fewer days. 1 Although withholding is not required under this new guidance, employers may withhold if they elect to do so.